India’s accelerating shift toward free markets

For a half-century after gaining independence in 1947, India’s politics were dominated by the Congress Party’s socialist orientation and tilt toward the Soviet Union.

In the 1950s, steel, mining, machine tools, water, telecommunications, insurance, electricity generation and other industries were effectively nationalized. The banks followed in 1969. The country’s first prime minister, Jawaharlal Nehru, also pursued land redistribution.

Innovation was stifled by the Industries Act of 1951, which required all businesses to obtain licenses from the government before they could introduce, expand or change their products, a system known as the “Licence Raj.” The government also imposed import tariffs in the name of encouraging domestic production, and Indian companies were prohibited from opening foreign offices. Foreign investment dried up under stringent restrictions and a labyrinthine bureaucracy.

As a result, manufacturing never blossomed and the economy stagnated at what the economist Raj Krishna called the “Hindu rate of growth” of 3 percent to 4 percent annually, distinctly subpar for a developing economy and far lower than in other Asian economies. From 1950 to 1973, annual growth in India was 3.7 percent, or 1.6 percent per capita, while Japan’s economy grew 10 times faster, and South Korea’s five times faster. China’s expanded at a sustained 8 percent annual rate.

State enterprises

India’s economy began to change dramatically in 1991 with the shift toward capitalism. In addition, India has historically had a much more free-market orientation than some other large developing countries, notably Russia and China. Its film industry, Bollywood, freely cranks out movies that range in quality from excellent to awful, while in China, films are largely propaganda tools whose content is tightly controlled by the government. State-controlled enterprises in India account for 14 percent of gross domestic product, compared with about 50 percent in China.

India has the advantage, at least in our world of slow growth and meager import demand in the United States and Europe, of being much more domestically oriented than China and the other export- led countries in Asia. After independence, Indian leaders advocated self-sufficiency and used high tariffs to keep out imports in order to encourage local production.

India’s turn from socialism to capitalism, which culminated in 1991, wasn’t voluntary; it was a consequence of severe economic and financial pressures. In the 1980s, persistent budget deficits forced the enactment of austerity policies. In 1991, a foreign-exchange crisis pushed the government to align spending with revenue and move away from fixed exchange rates. The rupee, which was overvalued and discouraged foreign investment, fell. Led by Manmohan Singh, then finance minister and now the prime minister, the government also opened the door to foreign investment and Indian companies were allowed to borrow in foreign capital markets and invest abroad. High inflation was tamed. These new policies initiated the boom in information technology.

At the same time, life expectancy jumped to 64 in 2008 from 58 in 1991. Literacy has risen.GDP per capita grew to $3,270 in 2009, from $925 in 1991. Airlines and telecommunications companies were privatized.

Nevertheless, progress since the early 1990s has been limited, as shown by the slower growth in India’s real GDP compared with China’s. Also, India recently announced a five-year plan containing what is probably an unrealistic goal for reducing the budget deficit to 3 percent in 2017, from 5.3 percent in the fiscal year ending March 31, 2013. The vague proposal recalls the Soviet Union’s five-year plans that were seldom met.

Cultural forces

Change occurs slowly in India. Its culture has evolved over millennia and is heavily influenced by Hindu philosophy, which doesn’t emphasize urgency. According to Hindu belief, death is followed by reincarnation. The process of birth and rebirth — the transmigration of souls — occurs until one achieves “moksha,” or salvation. Hindus also believe in karma, which holds that what one does in this life will have consequences in the next, and what isn’t accomplished in this life can probably get done later. Also, belief in predestination gives Hindus a sense of fatalism.

Hinduism also incorporates other forms of belief and worship. This creates a spirit of independence and a resistance to authority that makes it difficult for the government to enforce family planning and other policies. The chaos on Indian roads — where cars, trucks, ox carts, bicycles, rickshaws, pedestrians and stray cows all compete for the right of way — is an illustration of this independent spirit. The contrast with the disciplined Chinese society, where family planning is reinforced throughout the structure, is marked.

Nevertheless, the heat is on India’s leaders to move quickly to reform an economy that is under pressure as it struggles with ballooning deficits, sagging global growth, bad policy decisions and declines of its currency and in foreign direct investment.

Shilling is president of A. Gary Shilling & Co. and author of “The Age of Deleveraging: Investment Strategies for a Decade of Slow Growth and Deflation.” The opinions expressed are his own.